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Should Investors Follow Private Equity Into Life Sciences?

Bain Capital has put about $4 billion into industry funds since 2017

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Barry Cohen
Aug 19, 2021

Summary

  • The past few years have seen private equity’s confidence in life sciences soar
  • Bain seems particularly focused on biotech
  • Covid-19 has sparked interest among non-healthcare specialists
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Reflecting what it considers the vast potential of life sciences companies, Bain Capital is making another huge bet on the industry. The Boston-based investment firm has raised $1.9 billion in a new fund directed at pharmaceutical, biotechnology and medical device companies, reported Endpoints News.

The new fund is Bain’s third that invests in life sciences and includes $300 million from current and former partners, according to a spokesperson. One of the other funds was closed in 2017 at $720 million, and another in 2019 at $1.1 billion.

While most people don’t qualify to invest in private equity funds, there may be a strong message here: follow the money. The last several years have seen private equity’s confidence in life sciences soar. Healthcare Dive reported that data from Pitchbook showed private equity deals in the space more than doubled in the decade between 2008 and 2018, ultimately surpassing $100 billion in total value by that latter year.

Last year, Blackstone closed what is thought to be the largest-ever private equity fund for life sciences investing at $4.6 billion. Private equity firms have also been busy acquiring contract drug manufacturers including Cambrex and Parexel in multibillion-dollar deals.

Bain seems to particularly favor biotech, providing $350 million to jump-start Cerevel Therapeutics Holdings, Inc. (

CERE, Financial), a neurosciences company that was spun out of Pfizer Inc. (PFE, Financial). Bain owns 75% of the company, and Pfizer retains 25%. In the past year, shares of the Cambridge, Massachusetts-based company have more than doubled to over $23. Cervel is concentrating on developing therapies for central nervous system disorders, including Alzheimer's disease, Parkinson's disease and epilepsy.

More recently, Bain became an investor of EQRx through a private investment alongside the biotech's merger with CM Life Sciences II Inc. (

CMIIU, Financial), a special purpose acquisition company. The year-old EQRx is focused on developing brand-name versions of expensive medicines and selling them at lower prices.

Of course, investors in fledgling biotech and other life sciences companies - both private and public - understand that it may take years before they start seeing returns, if they ever do, because of the long, capital intensive and risky research and development process, especially for pharmaceuticals.

These concerns have become less of an issue with investors since the onset of Covid-19, according to an article on the law firm Pinset Mason’s website. This article muses, “Investors recognised that, with so many biotechs pivoting ongoing trials to test whether existing products in development had application to coronavirus, any good news from those companies could lead to substantial bumps in share prices, often in excess of 100%.” The size of the potential returns caused many investors who weren’t specialists in healthcare to take notice.

The piece cited success stories that raised industry awareness, specifically the partnership between Pfizer and the German biotech BioNTech SE (

BNTX, Financial) that developed the first Covid-19 vaccine. Investors who got into BioNTech a year ago have seen the value of their shares skyrocket by more than 350%.

Investors who are more comfortable spreading their risk might want to consider ETFs that hold a basket of stocks in smaller, emerging biotechs. I've listed some of my favorite biotech ETFs below, along with their returns:

  • Loncar Cancer Immunotherapy (CNCR, Financial), five-year return: 6.3%
  • Virtus LifeSci Biotech Clinical Trials (BBC, Financial), five-year return: 133.8%
  • iShares Evolved U.S. Innovative Healthcare (IEIH, Financial), return since inception: 53.3%
  • Virtus LifeSci Biotech Products (BBP, Financial), five-year return: 45.8%
  • Defiance Nasdaq Junior Biotechnology (IBBJ, Financial), return since inception 7.7%
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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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